Investors flock to Tesoro

San Antonio-based Tesoro Corp. set a record daily production level last year, processing 825,000 barrels per day on average, or 97 percent capacity.

Photo: Paul Conrad /For the Express-News

Tesoro Corp., the biggest supplier of gasoline to the Western U.S., has emerged as the top-performing energy stock in the past five years after the refiner expanded its business beyond just making fuels.

CEO Greg Goff took charge of San Antonio-based Tesoro in 2010 with a plan to invest in pipelines, oil fields and chemical manufacturing. The goal was to insulate the company from volatile commodity prices that so often had determined its fate in the past.

Investors flocked to the reshaped company, driving shares up eightfold from 2010 and making it the most sought-after energy stock by hedge funds.

“We changed the business model,” Goff said in a Jan. 28 interview. “We wanted to have more stable earnings than just being so dependent on refining.”

Tesoro has become one of the biggest targets for the United Steelworkers union, which is staging walkouts at eleven U.S. plants after negotiations for a new labor contract stalled. The strikes that began Feb. 1 have included three Tesoro refineries as the union fights for better benefits and safety measures at a time when the industry has reported stronger profits.

For its part, Tesoro has gained the most of any energy company in the Standard & Poor’s 500 index over the past five years with less volatility, making it the least risky energy investment with the highest returns, according to data compiled by Bloomberg.

That performance has continued as the collapse in crude prices since June dragged down an S&P index of oil and natural gas producers 27 percent. Tesoro rose 45 percent in the same period.

Despite Tesoro’s gains, there may be more headroom. Its shares are trading at a 12 percent discount to competitors, on the price to forecast earning basis.

Hedge funds have noticed, buying up 23 percent of the company, more than any other energy stock in the index, the data show. Billionaire Daniel Och’s Och-Ziff Capital Management Group LLC joined the trend last year, buying up a 3.86 percent stake in Tesoro, a holding now worth more than $400 million.

“No other U.S. refiner has successfully completed more meaningful strategic initiatives over the past four years than Tesoro,” Chi Chow, an analyst for Tudor, Pickering, Holt & Co., said in a note to investors.

In 2010 when Goff took charge, Tesoro earned $551 million in profit before interest, taxes, depreciation and amortization, or Ebitda. Goff and his management team laid out a plan to raise that by an additional $750 million in five years.

“Well, we did it in three,” Goff said. Since he became CEO, Tesoro has outperformed its peers by about 42 percent annually.

Goff had asked executives to take a deep look at the company and search for businesses where it could grow without profits being so tied to the rise and fall of oil and gas prices. To motivate them, he ordered that bonuses be tied to the completion of milestones, such as acquisitions and newly completed projects.

The first major milestone was the creation of a tax-advantaged master-limited partnership that could be used to invest in pipelines and processing plants, a rapidly expanding investment area for energy companies capitalizing on the boom in production brought by fracking and horizontal drilling in shale rock formations. Instead of paying other companies to move its oil and products, Tesoro would profit from its own transportation business.

The company’s pipeline partnership, Tesoro Logistics LP, began trading publicly in 2011. Tesoro owns 35 percent of the partnership and all of the general partner that controls it. The business contributed about $300 million to the company’s 2014 Ebitda, and that’s expected to increase to more than $900 million by 2017, according to company estimates.

Goff’s team also moved ahead of competitors to ship oil by railroad from North Dakota’s Bakken Shale play to the West Coast, securing a supply of lower-cost oil for its refinery in Anacortes, Washington, boosting earnings.

One of Goff’s biggest risks has been to invest more in California. His 2013 acquisition of a discounted BP PLC refinery in Los Angeles that had languished without buyers made Tesoro the biggest refiner on the West Coast. Tesoro plans to connect its $1 billion purchase with another nearby plant it owns in Los Angeles to increase efficiency and lower costs.

“When we looked at California, we said to be in there long-term and to be successful, you have to be the leading company,” Goff said. Despite the state’s reputation for heavy regulation hostile to fossil fuels, Goff saw California as an attractive market.

The result has been a more than doubling in Tesoro’s refinery operating profit in a state where most investors and industry experts had expected low profits, said Sam Margolin, an analyst for Cowen and Co.